Understanding and Confronting Uncertainty: Revisions to UK Government Expenditure Plans

We develop a simple model that motivates fiscal stabilisation policy, in the presence of economic

and control uncertainty. An examination of a real-time database of economic variables and forecasts

shows that our knowledge of the current and future state of the economy is subject to significant

revisions over time. Multi-year government spending plans are also significantly revised over

successive fiscal events. We show the risk for any given government expenditure plan by

constructing measures of historical expenditure revisions. We also show that the most significant

factor in explaining public expenditure revisions are changes to the expected path of GDP growth.

We illustrate how to model the components of public expenditure and are thus able to remark on

the extent to which expenditure is warranted. Finally we report on findings from interviews with key

policymakers in the past 25 years on how fiscal expenditure was managed and uncertainty

confronted.